Next, why do so many people who present themselves as credible experts and competent advisors still not even know which US stock sector did the best last decade (not to mention which one will do the best next decade)? Why have so many never even heard of the top-performer?
So, HUI is a group of 15 companies. In a way, they are like real estate companies, but for a very specific kind of real estate: mines full of precious metals. The companies of HUI do not just own the mines, but operate them. Also, the companies of HUI operate using business practices that are more conservative than the companies of the otherwise similar XAU index.
In fact, that is exactly what happened in 2008. As prices of silver fell more than 50% in only 4 months starting in the summer of 2008, the prices of the HUI sector fell nearly 70%.
So that is about why HUI did so well: the rising value of the mines owned by HUI. The mines rose in value because of rising prices of silver and gold, as well as popular expectations that silver and gold would continue to rise.
Since I was one of those researchers, I assert that the best answer is prudence (which is why I called that research “prudent”). Yes, a lack of motivation (as in not much profit motive or mutual interest with their clients) could be a factor for so many mainstream advisors who missed what was obvious to so many others, but motivation is only enough to begin the process. Motivation allows for those who also are distinctively intelligent to demonstrate not only motivation but intelligence, and the two combined are what I am calling prudence.
Now, let’s consider, at least briefly, what prudence points to today. By 2004, I concluded that the most important development in global economics was not relating to gold or silver, but to another commodity, and one that is traded in much greater volumes that those metals.
Not coffee, not sugar, but crude oil
. In my 2004 publication “The Real U.S. Deficit: Oil,” I began to focus on the geology of diminishing deposits of cheap oil. Naturally, as the cheapest oil to find and extract was used up, oil companies
looked for oil that was more and more expensive to find and access.
Did oil prices blow out metal prices?
Why did silver prices fall over 50% in 4 months of 2008? The overall expectations about the global economy is one factor. As people started to be more concerned about cash to cover their debts, they were dumping silver, especially silver that they had borrowed money to buy. But even more specifically than any general financial trend of lending, borrowing, buying, or selling, I assert that it was clearly the spike in prices of fossil fuels which interrupted long-standing global economic trends, including the surge of investing in silver.
In fact, even mining operations were directly effected by the high price of oil and other fuels used in their mining operations. In 1999, oil was only $11 per barrel. In 2008, oil spiked up to $148. Imagine what would happen to your own business if a raw material that was a big part of your existing operating expenses rose by over 1200% in 9 years. Notice what happened to airlines from 1999 to 2000 as oil doubled in price (blue line below): a 40% decline (red line below). What is one of the biggest expenses of airlines: fuel, right?
The reversal of price trends for oil and gasoline in 1999 is a change that is important to the global economy and is the obvious choice for the primary cause of the shift in global stock prices peaking by the year 2000, in particular the collapsing of prices of airline stocks starting in 1999.
As investors were spending more in 1999 on fuels like oil, their perceptions about the future value of airlines naturally plummeted, considering that any expectation of a continuing rise in fuel prices would naturally shrink the profits of airlines. In fact, within a few years, several major airlines in the US were bankrupt. Oil prices continued to rise while the recent top-performer of the 1990s, high tech stocks, plummeted.
The NASDAQ 100 fell more than 20% in the first two trading days of April 2000. By 2002, it was down 83% from it’s all-time high in 2000. Could the continuing rise of oil prices have been a major factor in that 83% decline (and the relatively muted rebound since 2002)?
So, in my 2004 publication, I first used the term “The DominOIL Effect.” (See www.TheDominOILeffect.com
) It references not only the geology of declining supply, but also the economics of rocketing demand, resulting in changes in the financial measurements of oil prices (a rise from $11 in 1999 to $148 in 2008), plus a whole series of predictable consequences: a larger portion of budgets goes to purchasing fuel, then those most dependent on competing for diminishing supplies of imported oil- including industries (airlines), households, and regions (Japan, EU, desert cities of the US)- will face budget crunches, then will lend less and spend less on most anything except fuel, so prices of many investments as well as goods and services will plummet (airline stocks, tech stocks, housing stocks, real estate, financial stocks, silver, etc), eventually leading to predictable changes in the economic affluence and political influence of various regions worldwide.
So what is the next HUI (or the next crude oil)?
As oil prices rise, what can be anticipated in regard to the perceived value of the various oil deposits that are relatively expensive to access, such as the oil sands of Alberta province in Canada or deposits of oil deep under the water of the Persian Gulf? What is predictable about the companies and local economies related to those deposits if prices of oil continue to far outperform all other commodities?
Just as the major oil companies of XOI are like the major mining companies of XAU, is there a less prominent group of conservative oil companies that are functionally similar to the HUI mining companies? Do they also have ample oil reserves, but relatively expensive to access?
Actually, I do not know. It would not be especially challenging to find out, but let’s focus for now on the absolutely simplest of issues: redistribution of wealth and power to certain regions of the planet.
For individual companies, the actual cost of extracting and refining oil can vary considerably depending on the deposit. Also, it is possible that a new deposit will be found, such as in Utah, that would diminish the relative value of a top oil-producing US state, Alaska.
But what is easiest to forecast is regional prominence. As the US and USSR were the top two oil-producing regions of the 20th century, they rose to economic and then geopolitical dominance as superpowers. However, Saudi Arabia has been the top-producing country for several years now. Could they be the next country to attain superpower status, as oil-importing regions that have been geo-politically prominent (like Europe, the US, and Japan) face economic instability?
As of 2008, the balance of global productivity of oil has already made what geologists expect to be a permanent shift. The non-OPEC regions (including both the US and the Former Soviet Union) are forecast to produce a smaller and smaller proportion of the total global production of crude oil, with OPEC nations currently only slightly ahead, but soon at a 2:1 ratio, then 4:1, then 8:1 and 16:1 and so on. When the OPEC nations produce 70%, 80%, and 90% of the total global supply of oil, could that also be a factor in their economic prominence and geopolitical dominance?
As oil prices rise, that does tend to increase production at deposits of oil that are relatively expensive to extract and refine. That is the same principle that took HUI to 1600% gains in a decade. However, the balance of power does not favor Alberta in the mid-term. As oil prices reach up to the level where production is profitable, that also multiplies the profit margins of oil refining in the middle east, where much more conventional (cheaply accessed) crude oil is available.
As those nations are enriched by high oil prices from importing developed nations, those OPEC nations may invest that wealth in to more refineries and so on and may increasingly be capable of quickly extracting more of their cheap oil, driving up production enough to chop down global prices. Even if shale oil reserves in Alberta result in that province doing better than neighboring provinces, the actual power would increasingly be with OPEC.
That general shift toward the economic dominance of OPEC nations is much more probable than the particular stock price of any particular sector or company. Control of the global economy will increasingly be centered o n OPEC (at least, in the absence of any relevant technological innovation).
Consider that oil-production has been the single most dominant cause of the shift in global leadership to various regions since at least the early 20th century. The US and USSR blossomed on oil production, and so are the OPEC nations. Japan and the EU may have uniquely unfavorablecircumstances, as their economic dependence on oil is not balanced by continuing local production, as in the US or Former Soviet Union.
So, by early 2003, I considered the HUI sector to be one of the most interesting long-term opportunities in the US stock market. However, the 1600% gain in a decade is to me just a baseline of what is clearly possible as an easy gain. HUI was just the top-performing stock sector for using a buy-and-hold strategy.
Just as the HUI sector was several times better than any other stock sector, certain strategies reliably perform several times better than other strategies that may be much more popular. Also, which strategy is best varies with time.
There was a time when speculative real estate flipping produced enormous unearned gains. However, speculative real estate flipping led many Japanese to bankruptcy by the 1990s.
So, there are two reasons that I am not going to reveal what I would do for the next decade with my investments. First, I have no interest in freely distributing that information in advance. Second, I simply do not know yet what I will do across the entire decade.
If there is one strategy that is assured to eventually perform far below average, it is “buy and hold.” Even average investors occasionally re-allocate as new technologies and industries develop. Who would seriously have suggested in the 1970s that buying 8-track audio cassettes and holding them for the next few decades would be the best investing strategy across that entire period? As technology shifts, so do investors. Eventually, obsolete items may become popular again and unusually valuable as rare collector’s items, but one decade’s sentimental antique collectible may turn in to another decade’s game show trivia. For instance, are telegraphs very valuable today or traditional butter churns? “Buy and hold” is a strategy with a long and established history of below average performance.
What may interest you is a partner who is both motivated and intelligent (prudent!). Who can be relied on to consistently produce above average results except for a prudent partner? Most professionals simply lack the mutual interest to even apply all of their possible intelligence, given their vested conflicts of interest as licensed agents of companies that are paying them commissions to sell investments that serve the best interest and profit margins of the companies paying those commissions, even at the expense of those imprudent enough to buy and hold them.
I invite you to select a partner who you recognize as distinctively prudent. If you are interested in consulting with me, before you contact me, note that I may also be selective in my choice of partners. After all, I am not getting a commission to push and dump some imprudent investments on the mainstream masses. As a partner receiving a share of the profits produced, I have a vested mutual interest to reliably maintain above average results… even beyond easy 1600% gains in a decade.
J.R. “Fibonacci” Hunn
(877) 394 2467
(877) EZ Gains